As inflation continues to rise, you may want to consider savings bonds as a way to protect your money, especially bonds with inflation-adjusted interest rates.
Savings bonds are generally considered safe investments. While they won’t be heading to the moon anytime soon, they can be used to protect what you already have.
What is a savings bond?
A savings bond is essentially a government-issued loan. Think of it like an IOU, but with interest. This is the way the government raises money for large capital projects, such as building broadband in rural areas or funding the military during times of war.
The Treasury Department is responsible for issuing savings bonds. They rely on complete faith in the US government.
Although savings bonds are a safe investment option, they are not the most profitable. Bond interest rates have historically ranged from 0% to 5%. Interest is compounded every six months and increases over time.
Interest is paid when the savings bond is redeemed. You will have to keep your money in bonds for years and sometimes decades if you want to earn interest.
Once a bond reaches maturity, interest on it ceases to accrue. When you are ready to withdraw your money, your initial investment will be returned to you. You can keep the money for yourself or use it to buy a new bond.
Bonds I and Bonds EE
You can choose from two different types of savings bonds. They differ in terms of repayment, initial costs and application of interest rates.
Series I bonds adjusted for inflation. They have two rates: one is fixed and one is variable. The fixed rate is set to zero and is guaranteed never to fall below that value. This means that the bond will never lose its value.
The other rate is the inflation-adjusted rate. Every May and November, the Ministry of Finance announces new rates. I bonds can bring high interest in times of high inflation.
Series I bonds mature after 30 years, after which they cease to bear interest. These bonds are sold at face value. If you buy a Series I bond for $100, you can cash it out for $100.
Some penalties are provided for early cashing out of I bonds. If they are liquidated before the expiration of the five year period, you will lose some of the interest earned on them. However, after five years, you can cash them out without any penalties.
EE series bonds have a fixed rate, and also receive interest. These bonds are priced differently than I-bonds. Like I bonds, EE bonds also mature after 30 years. But if EE bonds are held for 20 years, their value is guaranteed to double. For example, after 20 years, a $25 Series EE bond is actually worth $50. Plus interest.
These bonds must be held for at least one year. As with I bonds, if you cash out EE bonds before five years, you will lose some of the accrued interest. The big difference between the two is that if you cash out an EE bond under 20 years, you will only get the interest and what you originally paid for the bond, not the increase in value.
How do savings bonds work?
Savings bonds work like IOUs with interest. In exchange for lending money to the government, the Treasury agrees to pay you interest.
Bonds are similar to investing in stocks, but because they are backed by the government, they carry less risk. Interest accrues until the bond reaches maturity and is then paid along with the value of the bond.
How to buy savings bonds
The best way to buy savings bonds is online. This can be done through the Department of the Treasury website at TreasuryDirect.gov.
Series I bonds can also be purchased as a physical sheet of paper from a brokerage firm or commercial bank. EE series bonds can only be purchased online.
The minimum purchase amount is $25 and the maximum is $10,000. Series I paper bonds are slightly different. The maximum purchase amount for them is $5,000, and the face value is $50. Note: If you go the paper route, you will have to use the tax refund.
Read more: How to buy bonds
Gift Savings Bonds
An easy way to gift a savings bond is to choose Series I paper bonds. When you file your tax return, you can indicate how much of your refund you would like to receive in the form of a savings bond. You don’t need any information from the recipient and you can give a paper bond just like cash.
However, waiting for the tax season can be inconvenient, so you can also issue e-bonds if you wish. To do this, you need to know the recipient:
- Full name
- Social Security Number (or Taxpayer Identification Number)
- TreasuryDirect account number
Buying a savings bond as a gift is very similar to buying one for yourself. The main thing you need to remember is that the e-bond is tied to the recipient’s social security number. It cannot be traded or sold after it has been gifted to them.
Interest rates on savings bonds
The inflation-adjusted rate for Series I bonds is currently 6.89% as of November 1, 2022.
The EE series bonds are currently yielding 2.10% per annum. This is a fixed rate that does not depend on inflation.
When do savings bonds mature?
Savings bonds have a maturity of 30 years. Once they have reached this point, they no longer earn interest on bondholders.
You can cash out a savings bond without penalty after five years. This will deprive you of additional interest, but you will not lose the face value of your original investment.
Are savings bonds going up in value?
Yes and no. The nominal value of the Series I Notes does not change. A $100 bond bought today will still be worth $100 tomorrow. The increase in value occurs in the form of interest, which accrues over the life of the bond until it is redeemed.
However, EE series bonds are rising in price. Their value can double from their original purchase price. However, there is a caveat: you will have to hold the bond for at least 20 years to see such a return on investment.
How much is my savings bond worth?
You can check the value of a savings bond using the Treasury’s bond calculator.
For example, if you were given a $50 Series I bond in 2000, it would be worth $183.36 today. A $25 Series EE bond will cost $54.18.
The Savings Bond Calculator also tells you the next interest date, as well as the date your bond will mature.
How to find savings bonds in my name
You may already have a savings bond and not know it (thank you, grandma). To find out if you have any maturing bonds in your name, you can use the Treasury Department’s Treasury Hunt search tool. All you need is your SSN and state of residence.
How to cash out savings bonds
When you’re ready to cash out your savings bond, simply log into your TreasuryDirect account and follow the instructions. Make sure it has a bank account linked to it so you can get your money. The deposit arrives at your bank within a few business days.
If you have a paper bond, you can contact your local bank. The bank may limit the amount you can cash out at one time, depending on the value of your bonds. Visit the Treasury Direct website for more information on cashing out paper bonds.
Read more: How does a bond work?
Are savings bonds a good investment?
Savings bonds can be a good investment. But be warned: they don’t usually bring in a lot of money.
One of the benefits of investing in savings bonds is that they provide stability. They will not lose face value and will not receive an interest rate below zero. Inflation-adjusted savings bonds can also help you protect the value of your money during times of high inflation.
Another reason why savings bonds can be considered a good investment is their tax benefits. While the interest they earn is federally taxable income, it is not subject to state or local taxes. Depending on how much money you make or where you live, savings bonds can be a good component of a tax optimization strategy.
In addition, if the savings bond is used for higher education, the interest may also be exempt from federal taxes.
Other types of bonds
Savings bonds are a solid investment option, but they’re not the only bond you can choose from.
Treasury bonds
In addition to savings bonds, the Treasury also issues treasury bonds. They are known as treasury bills (GKOs), treasury bills (GKOs), and treasury bonds.
The difference between these different types of loans is that they repay at different times. Treasury bills can mature in a matter of weeks, while Treasury bonds can mature in a couple of decades.
Municipal bonds
State, county, and city governments also issue bonds. Like bonds issued by the federal government, these bonds are sold to raise money for capital projects such as new roads.
These bonds may sometimes be exempt from federal, state, and local taxes. Depending on the bond, they can also mature faster, such as in just a couple of years.
Corporate bonds
It may come as a surprise, but you can buy company bonds in addition to stocks. The big difference is that a share is the capital of a company; a bond is just a debt.
Corporate bonds are a less risky alternative to stocks but do not have any shareholder benefits. Like government bonds, corporations issue bonds to raise capital. Interest on a bond is paid either at a fixed or variable rate. When a bond reaches maturity, interest payments on it cease and the original investment is returned to the bondholder.
Bond index fund
The passive investment option to consider is index fund investing. Instead of owning a specific Treasury bill or bond, an index fund owns many different ones. Investors buy shares of an index fund in the same way they buy shares of a company. Popular brokerage firms such as Charles Schwab and Vanguard offer their own bond index funds.
Summary
Savings bonds do not lose their original face value, making them a low-risk investment option. During inflation, they can be used to protect the value of your money, and there are even some tax breaks for holding savings bonds.
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